Who Needs an Adviser?
If the 401(k) plan run by Morrison Textile Machinery were any easier for employees to use, it simply would deposit money into their bank accounts whenever they needed it once they retired. Consider the three challenges that have long confronted plan sponsors and their advisers: getting workers to participate in their retirement savings plans, convincing them to contribute at sufficient levels, and, finally, making sure they follow an investment strategy that prudently balances risk and reward. Morrison, a 120-employee manufacturer in Fort Lawn, South Carolina, largely has those problems covered. Unless workers opt out, the company enrolls them in its $3.8 million plan automatically. It sets their default deferral rate at 6% of salary, so they can take full advantage of the company’s matching contribution of 50% on the first 6% of pay. Finally, it defaults employees who don’t select their own investment options into target-date lifecycle funds—neatly keeping with new guidelines for default investment options recently proposed by the Department of Labor. Thanks to the company’s year-end profit-sharing contribution for all employees, the plan even has a 100% participation rate, although only 68% of the employees contribute their own money to the plan. If ever there were a plan that would not seem to require the services of a retirement plan adviser, this might be it.
Yet, even though Morrison’s retirement savings plan would seem to be running on autopilot, Morrison Chief Financial Officer Lindell Robinson still relies on independent financial adviser Jeff Crenshaw, a principal with CAPTRUST Financial Advisors in Charlotte, North Carolina, to help oversee the plan. “We’re a mid-size firm,” Robinson explains. “A CFO at a company our size wears a lot of hats. Jeff has the expertise and knowledge to make sure we’re meeting our fiduciary responsibilities and staying on top of any changes in the law. He also provides us with quarterly performance reviews of all the investment options offered by our plan. Jeff kind of keeps us in the clear and makes sure we’re doing the best for the 401(k) participants.”
At a time when employers can choose off-the-shelf plan designs from plan providers and automate just about any aspect of their defined contribution plans—automatic enrollment, deferral increases, and systematic portfolio rebalancing via lifecycle funds or managed accounts—one might well wonder just how a financial adviser can continue to add value. Fortunately for advisers, the answer remains “many ways,” including helping with vendor selection, plan design, investment selection, and participant education and advice. “The role of the adviser is as crucial as it’s ever been,” says Catherine Collinson, senior vice president for strategic planning at plan provider Transamerica Retirement Services. “Plan sponsors still have a lot of choices to make in terms of vendor selection, the overall composition of their plans, fee structures, disclosures, and periodic review of plan performance. Most small-business employers do not have the staff, capacity, or expertise to do that work. That’s where they really can benefit from using an adviser.”
Collinson also notes that the new Pension Protection Act of 2006 (PPA) provides “huge opportunities” for plan sponsors to improve their plans and gain various fiduciary safe harbors, but that an adviser can be helpful in making sure they meet the conditions of the new law (see Now What?PLANADVISER, Fall 2006). For example, employers who take advantage of the new automatic enrollment safe harbor can avoid the travails of average deferral percentage (ADP) testing and top-heavy testing limits—provided they adhere to specified design requirements.
The Personal Touch
Financial advisers can be particularly effective in helping design retirement plans that align with plan sponsor business objectives, such as attracting new employees, retaining veteran employees, or simply giving older employees the financial wherewithal to retire comfortably.Drawing on their experience—and broad access to industry data—advisers can help plan sponsors with that ever-present concern: What is everybody else doing? They can offer insights on issues such as: Does automatic enrollment make sense and, if so, what should the default investment option be? Should the employer match worker contributions and, if so, to what extent?How long should employees have to wait before being enrolled in the plan, and how soon should company contributions vest? What should the plan’s investment policy statement say? How many investment options should the plan offer, in which asset classes, and what specific investments should be used to fill out the investment menu?
“Our most frequent role is providing the [investment] advice component of the plan for the employer,” observes Joshua Schwartz, chief operations and investment officer for Retirement Plan Advisors LLC in Chicago. “There are two main pieces to that activity. The first is menu design—What should it look like? How many funds should there be? What asset class representation do you want? Do you want fund redundancy or just a core lineup? The second is picking the funds themselves.”
Even after funds are selected, they need to be monitored continually—another niche for financial advisers (see Finding a Good Fit, page 62). Funds that were once highly appropriate for the plan may become less so due to changes in managers, investment strategy, or fees. “Even with index funds and lifecycle funds, there are things that can happen,” notes Dave Bernard, president of Wealthpoint Inc., a Phoenix, Arizona-based advisory firm. “The expense ratio could creep up, or performance could lag relative to the fund’s benchmark.’ In the case of a lifecycle offering, the fund company might change the fund’s so-called “glide path,” or rate at which it transitions to a heavier allocation to fixed income and a lighter allocation to equities. An adviser can monitor for these factors and, where necessary, recommend a change.
Education and Advice
Educating plan participants is another area where financial advisers can have a big impact on a plan’s success, particularly in cases where the provider—a mutual fund company, insurance company, or investment bank—may not have the time or local presence to provide highly individualized service. “They bring a level of personalization to that problem that we couldn’t bring,” concedes Mark Fortier, chief technology officer for plan provider Diversified Investment Advisors in Purchase, New York. “They know that sponsor; they know their people. They can do what we can’t do.”
Even in a highly automated program, advisers can be helpful in educating participants about how to maximize the value of their plan. Consider the example of the City of Chesterfield, Missouri, where Jeremy Craig, director of finance and administration, says the city thought it was headed in the right direction two years ago after it worked with a national consulting firm, CBIZ Consulting Group, to find a new provider for its $7.3 million 401(a) and $4.8 million 457 defined contribution plans. Although the consulting firm helped the city come up with what Craig characterized as a “very stable, very good” offering, it seemed to Craig that city employees neither valued the plans highly nor used them well. For example, the plan offered five target-date funds, so, in theory, this plan too could have run itself. However, many participants allocated their contributions among all five of the target-date funds offered by the plans instead of using just the one that most closely matched their investment horizon. Also, only about 42% of eligible employees participated in the 457 plan, which is funded solely with participant contributions. The 401(a) plan, by contrast, is funded exclusively by the city, at a rate equal to 8% of each worker’s salary, similar to the way a profit-sharing plan is funded.
Chesterfield turned for help to registered investment adviser Jim Ladlie of Retirement Plan Advisors (RPA) in its St. Peters, Missouri, office. Ladlie and his colleagues met individually with city employees to explain their retirement plans to them and help them understand how they could use the plans to maximum benefit. Where employees wished, RPA agreed to manage their retirement plan assets for them at a cost of 1% of their plan assets annually.
“Not only did we get immediate positive feedback from employees, but we also saw participation in our 457 plan go up 100%, from the 42 percent level to the mid-80s,” Craig says. “Our employees value what they have much more now, and are more active in saving for their retirement.” Meanwhile, Ladlie continues to visit city offices monthly to meet with any employees who want to review their investment strategy with him.
Schwartz suggests that Chesterfield’s experience is not uncommon. Without an adviser’s help, he says, many retirement plan participants routinely make bad investment choices. Too often, he says, “the fear and greed that drive people to buy high and sell low continues to dominate investor behavior. They chase returns. Even when offered lifecycle funds, which conceptually make a lot of sense, they underutilize them or hold multiple funds anyway.” There is no guarantee, of course, that participants will do better with the help of an adviser; that depends on the adviser’s skill and his ability to convince participants to follow a more prudent investing path. However, where that is the case—and where plan sponsors give advisers the opportunity to meet individually with participants to provide investment advice—advisers have yet another opportunity to boost the value a plan brings to participants.
A Changing Landscape
Even if some plan sponsors once might have thought themselves capable of running their defined contribution plans on their own, two new developments on the retirement plan scene are likely to have many of them rethinking that position. One was the passage of the PPA, which, among other things, encourages employers to provide investment advice to plan participants through qualified “fiduciary advisers” by providing them with an exemption from the prohibited transaction rules of ERISA and the Internal Revenue Service. In the past, fear of violating those rules made some sponsors wary of making investment advice available to their plan participants in any form.To be sure, sponsors and their advisers must meet a laundry list of conditions outlined by the new law to benefit from the exemption. Still, Bob Francis, chief operating officer of National Retirement Partners, a national network of independent advisers, predicts the PPA, by offering the exemption, will produce “greater demand for more independent, non-conflicted advice and communication to participants,” and that most sponsors will want to have an expert financial adviser at their side to handle that responsibility. (The PPA identifies fiduciary advisers as registered investment advisers, banks, insurance companies, broker/dealers, registered representatives of a broker/dealer, and employees and affiliates of any of those entities.)
“If I’m a sponsor, I’m very concerned right now about litigation,” suggests Stace Hilbrant, managing director of 401(k) Advisors in Chicago. “What sponsors are worried about is, How objective and independent is my vendor? Only an adviser who is independent and objective can provide that layer of liability mitigation I want between my vendor, who has a profit motive in offering its own funds to my plan, and my plan participants.” Because they have a broader view of the marketplace, good advisers can help plan sponsors know whether the fees they are paying are appropriate and, if not, can help them negotiate better deals or find them somewhere else.
Another potential new driver of demand for advisers is the clutch of lawsuits filed by St. Louis attorney Jerome Schlichter of Schlichter Bogard & Denton against 10 large plan sponsors alleging that they allowed their plans to be socked with unreasonable fees in violation of the Employee Retirement Income Security Act (ERISA). Named in the lawsuits are Bechtel Group, Caterpillar, Exelon, General Dynamics, International Paper, Northrop Grumman, United Technologies, Boeing, Kraft, and Lockheed Martin. Although the suits are hardly a slam-dunk—many of the accused have denied the accusations and vowed to fight them—they illustrate what’s at stake for plan sponsors. Although it is unclear whether or not these plans had financial advisers working with them, Schlichter said that “having a plan adviser doesn’t mean that’s the end of the story. The plan adviser has to be looking at these expenses.”
Ultimately, of course, fear is not a very friendly marketing tool. The good news for financial advisers catering to the retirement plan market is that, despite the multitude of investment offerings competing with the adviser, there are still plenty of positive reasons for prospective clients to want their services.